In an interview with Swiss daily Tagesanzeiger, a well-known economist has warned that Switzerland risks bankruptcy, if the recent market turmoil centering on Eastern Europe is not contained quickly. At issue are loans made in Swiss francs to Eastern European debtors. With many countries in the region falling into depression, currencies and asset prices are plunging. Therefore, debtors domiciled in Eastern Europe are increasingly expected to have difficulty with mounting foreign debt loads — and that spells trouble for Switzerland.

Below is my translation of the Tagesanzeiger article.

Switzerland threatened with bankruptcy

Swiss banks have given billions of credit to Eastern Europe – now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Borrowers in distress

Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.

In Poland, Hungary and Croatia, the Swiss franc has become an important foreign currency – the dollar, so to speak, of Eastern Europe. Thousands of households and businesses have franc loans. Why?

The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.

Now, this system has been shaken?

Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.

What does this mean for Switzerland?

It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation – which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion U.S. dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 percent, the banks would lose a lot of money.

Is the federal government going to intervene now?

If the banks require a massive writedown of such loans, above a certain magnitude, the government must intervene. This is already happening via the Swiss National Bank. In Poland, it has made several billion francs available to the local central bank so that Polish banks can cover the loans. At the same time, the Swiss National Bank inquired by the European Central Bank whether it could borrow money in an emergency. This is a clear warning sign that the Swiss franc could be under huge devaluation pressures in the near future.

Swiss banks were too careless in their lending in Eastern Europe?

Yes, indeed. Many bankers wanted to earn a lot and neglected the risks. The National Bank is also at fault as it did not intervene. In addition, the regulator and the politicians completely failed.

What Switzerland must do now?

Now, the possible losses caused by these loans must be made transparent. Above all, all of the Eastern European risks must be fully disclosed. Together with the loan losses from UBS and Credit Suisse, the entire writedown for Switzerland could exceed the Swiss gross domestic product.

That is to say?

Switzerland, like Iceland, is threatened with a potential national bankruptcy. One consequence would be that the Swiss currency could fall massively in value — possibly even crash. Another would be that Switzerland’s credit rating would be massively downgraded. That would be a trauma for the country: Switzerland was always as a stronghold of stability. The franc could become an unstable soft currency. Then Switzerland would perhaps be forced to abandon the franc and take on the euro.

This article fills in a lot of gaps for me. Two weeks ago, I happened to catch another post in the Swiss press about the Swiss government issuing debt in U.S. Dollars. In my post "Why are the Swiss now issuing debt in U.S. Dollars? I asked an open question as to why the Swiss were issuing debt in dollars. No one knew and I had yet to hear a satisfactory answer to this question.

However, my post also pointed to central bank swap lines between Switzerland and a number of countries in Eastern Europe as a related event. The Tagesanzeiger article makes clear that these swap lines are needed due to Eastern European exposure to loans in Swiss Francs. I expect the U.S. dollar swap lines and dollar debt issuance are related – as are the Euro swap lines with the ECB – for liquidity in case of emergency.

These machinations are a testament to the continued fragility of the global financial system. The interconnectedness across currencies and countries is staggering. One domino falls and the whole global financial system is at risk.

Welcome to the dark side of globalisation.

[Update – 18 Feb 2009 730PMEST]: The Berlingske Tidene, a Danish newspaper is now covering this story. Here is the link, if you speak Danish:

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

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24 Comments

The Swiss deserve everything that’s coming to them. They’re still in denial about their role in WW2 and their banks and laws have been designed to rape the legitimate tax authorities of the world at great cost to those country’s poorer citizens. The Swiss have been in denial & the only relatively clean thing about the country is just possibly the snow – but only if it’s freshly fallen snow, cos it wont stay whiter than white in Switzerland for long.

OMG what a crap!
I could tell you just the same.. that britain deserves its trillion in new debt because of its imperialistic policies around the world.. or even America’s wars and funding of Al Qaeda against russia… to blame switzerland for its role in WW2 is just ridiculous.. I would rather be thankful for its attitude of respect for citizen’s privacy (banking secrecy) rather than beeing proud of other governments’ hostile and doubtful policies towards its own citizen. And if you just don’t agree to swiss policy of restrict information why don’t you ask Senator Levin why there still are tax havens in the US (Nevada and Delaware) and in the UK (too many to be listed)…

The translator of the article has missed out on a few things : a) Arthur P. Schmidt is NOT a “well-known economist”; he is a journalist with some economic knowledge, but nowhere in the top ranks. b) The newspaper “Tagesanzeiger” is by no means the best source for Swiss financial information. I suggest that the blog’s editor consult the “Neue Zuercher Zeitung” more often for serious comment. c) why are the Swiss issuing Dollar debt ? The answer is very simple and could have been found in other Swiss papers as well: as the Swiss National Bank is taking over the toxic assets of UBS (U.S. student loans ! among others) – all denominated in USD – it had to issue debt in this currency in order to avoid future exchange risks. I do not believe that translating this article in English will help a great deal U.S. and foreign readers to understand what is going on. It will rather confuse and (wrongly) frighten them. Switzerland is nowhere near bankruptcy, rest assured. — By another “well know” Swiss economist.

I am the one who translated the article. And, yes, Artur Schmidt is an ‘economic journalist’ rather than an economist. He writes at Money Cab, which I have referenced in the sources.

I am not taking a position in this post, but rather relaying information I believe is relevant. I tend to think Schmidt is overplaying the severity of the crisis regarding bankruptcy. But, his conclusions should not be dismissed i.e. Swiss franc weakness and ratings downgrade.

The figures used by Schmidt are real as are the problems at UBS and Credit Suisse involving additional potential writedowns. These are problems that are widely known.

Also, you should note that I quoted from NZZ in an article about UBS. The link is below.

The Swiss are funding the UBS assets they took on in September. UBS transferred positions worth $16 billion to the same SNB StabFund issuing the short-term U.S. dollar notes. The SNB is acquiring tens of billions in toxic assets. Here is a story on that (here). This seems very likely.

This piece is very much like the one published by Mr Prichard in the Telegraph last Sunday about Eastern Europe and the Euro.

Writing something like: “At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs.” is irrelevant as this loans were issued long before September 2008.

It’s true that the Polish Zloty lost 20%-30% of it’s value in the last year but at the same time the CHF Libor crashed and the monthly payment is now lower for some mortgages.

Of course the current hardship could make it more difficult for some people to repay a loan and this could further destabilize Swiss banks and Switzerland . But one must not forget that this hardship results from the wrongdoings in the U.S.

I wonder why The Telegraph, Moody’s and even RBS try to destabilize the Euro and the CHF.

@Michael, the bankruptcy title is an attention grabber, but, as I have said, I believe it overplays things a great deal. However, all of this was easily foreseeable. I predicted as much a full two months ago. (See the post below).

What irks me about the situation is that many policy makers had their heads buried in the sand about what was sure to transpire. We are in a deleveraging process with many potential pitfalls. A much more aggressive response is warranted than the one we have seen in Europe, the UK or the U.S. Had these problems been addressed earlier and an IMF bailout or similar remedy been proposed, we wouldn’t be in this situation right now.

From what has been published so far regarding loans made to Eastern European countries at risk, it looks Austria > Germany > Italy are going to suffer the most. Switzerland’s loans are not big in comparison. So, I doubt the article is true. Tagesanzeiger is a newspaper that loves to bash banks and wants to provoke to attract readers. Switzerland going belly-up would not be good news for other countries as it is one of the major money centers. So, won’t happen.

If you know nothing about history than the junk you read in the “news”papers, you rather shut up. The Swiss have thouroughly reflected on their role in WWII several times over. In the 90s, when the silly campaign of Senator d’Amato against Switzerland was what formed your pitty brain, the Swiss taxpayers have financed a complete review of *all* Swiss banks to the tune of 1 billion Swiss francs only to find 76 million CHF on accounts from WWII, two thirds of which where non-jewish in origin. It’s the British, the French and many others who are in denial about their dark sides, certainly not the Swiss, pitty you!

Situation in Poland:
2008.07 – 1CHF = 2.0PLN – you can go to ANY bank and take a loan for 120% value of you new flat/apartament. i live in Warsaw, lot of my friends took that loan. unemployment rate – 10% but in warsaw was close to 0% especially if you have a master degree and skills to work in office such as advertising agency or as finanial advisor or similar type of job.
Now – you cannot take a loan or rent a money from bank. one square meter is down close to 25% from 2008.07. franc is up – 1CHF = 3.3PLN within my friends unemployment rate is close to 20%. banks are full of CHF loans, even if you sell the apartament you have close to half of the money you borrowed. did i mentioned that the loans weve given in rates even for 50 years?

Suffice to say that your reply made no mention of my other accusation that the poor of the world have suffered because of the smug, self-enriching Swiss attitude to secret bank accounts and their rwo-fingered response to legitimate foreign tax-authorities. Hopefully the recent UBS $ 3/4 billion fine and having to open their books to the US authorities will be just the start of a global revolt against Swiss banks. Not before time.

The article was later dismissed by the Swiss National Bank. One omission is essential: most of the loans in CHF were originated by Eastern European banks which financed themselves by emitting CHF bonds.
A few serious Swiss economists are afraid that the CHF will even strengthen as a result of this…

@Stevie: your knowledge about Switzerland must be coming from FOX News, is it?

C’mmon Chris. I suppose the Swiss are doing the poor of the world a favour with their banking secrecy laws? I hear the U.S. want 50,000 more names and the Swiss have given their usual, “neutral” two-fingered response. Making money from the misery of the poor is clearly as addictive as class A drugs.

Maybe you mix up things. The exposure of Switzerland is
60 B in comparison do 400 B of other European countries, like Austria, Spain, England, Italy, Germany.
To Steve: The Swiss did not burn children like the USA
in Vietnam and the Israeli now in Gaza. The Swiss have saved twohundred thousand including 30’000 Jews, who never said thanks. On the contrary the Jews have recveived Billions from Swiss Banks, about 20 times the amount in the forgotten accounts. I am a banker who treated jewish customers after the war. These accounts were of no importance to the banks.They just added interest to accounts, every year and wated for someone to claim the money.l
Today we live through the same aggressiveness from the Americans. Take your money back, we really do not need it, provided you can depostit it in a safe account in your country. Switzerland is now a world leader not only in luxury watches, also in Drug, Food, machinery, surveillance etc.. We really do not need bad money.

Dear George,
I know it is very convenient to be a Pacifist country and let the rest of the world do the fighting for you when the Hitlers and Stalins roam, but the comment about the USA burning children in Vietnam is highly insulting to all the American and Allied troops that were literally burned alive by German artillery and tank fire in order to free the Swiss from the boot of Hilter at the end of WWII. It is so easy for the Liberals of the world to criticize those who have stood up for the freedoms of others, many thousands of miles from home, while they sit comfortably on their fat derrieres and postulate what is wrong with the world. Easy to be a critic. Much harder to be a doer. Stay safe in your mountain retreat, us “children-burners” won’t lift a finger to bail you out when Russia comes a-calling and they will come a-calling.

This is the post of the most aggressive nation in the history… ridiculous…
How many wars has the US started during the last seventy years?
And how many Russia has?
Poor US brainwashed citizens will afraid of red alert forever, since this is a very convenient argument for their government to attack other countries bringing them “democracy”.

P.S. this is the USSR governed by Stalin which played the main role in saving the world from Hitler.

Why is the comment about the USA burning children in Vietnam highly insulting for you?
Everyone in the warld saw pictures of Kim Phuk – a girl burned by US napalm during the war in Vietnam.
And the only reason for the war in Vietnam to start was not “standing up for the freedoms of others”, but prevention of communism spreading in Asia. This is the official version.
Nothing has changed in American policy ever since – you start wars on other continents for the sake of your own interests.

TANIA, YOU ARE PROBABLY FREE TO DEBATE THIS TODAY THANKS TO THE BLOOD
AND SWEAT OF AMERICAN MEN AND WOMAN, THOSE OF YOU WHO DO NOT HAVE THE
COURAGE OR THE MEANS TO FIGHT FOR YOUR OWN FREEDOM OR THE FREEDOM OF
OTHERS. MY FATHER FOUGHT IN KOREA AND 3 YEARS IN VIETNAM, AND YOU
LIBERAL DO-NOTHINGS AROUND THE WORLD CAN ONLY CRITICIZE AMERICA AS YOU
SIT ON YOUR FAT ASSES AS MONDAY MORNING QUARTERBACKS. BAD THINGS HAPPEN
IN WAR. HOW MANY BRITISH CHILDREN WERE BURNED TO DEATH DURING HITLER’S
DAILY ATTACKS ON ENGLAND. GROW UP. HOW MANY JEWISH CHILDREN WERE
GASSED OR STARVED. EASY TO BE A CRITIC, HARD TO BE A DOER IN THIS
WORLD. TO LABEL AMERICAN SOLDIERS AS “BABY BURNERS” IS A GROSS
DISTORTION OF HISTORY AND THE FACTS THAT SPAN OVER 200 YEARS. IF YOU
DON’T LIKE AMERICA, DON’T COME HERE OR LEAVE IF YOU ARE HERE.

Ok,
you are right in that I am wrong saying that all American soldiers are children-burners (I did not say so directly, but I supported the post containing this idea, probably).
But I would like you to “grow up” as well. The war in Vietnam was not for anybody’s freedom, but only part of the war against communism. People of Vietnam did not ask you to come and save them, just as people of Iraq which now lies in ruins, and people of Afghanistan, and people of Yugoslavia etc…. Please, leave our continent alone… I am asking the God to save my country from you. The only thing I am really afraid of is that you come to “save” my people. Please, stop saving everybody by starting the war. We want peace.
WWII was started by Hitler, and we all tried to stop this war, Hitler was the aggressor and we were right in fighting against him (when I say “we” I am talking not only about my country, but about everyone who did their best at that time to save the world).
But please, please, please do not try to establish peace by starting the war. America is the aggressor now, and this is true from any point of view.

I see the things different than Bert.
a) I don’t think it is an evidence of competence to be a well-known economic author. The opposite is true, main stream economic authors did not at all forecast the crisis and its dimensions. Therefore it is much more an evidence of either stupidity or what is much worse, betrayal, as many of the well-known economic authors are agents of the Anglo-American-Jewish conglomerate.
How can it be a good thing to be a main stream well known economic author, when the vast majority of the media is owned by the same and the same people. This shows only devotion to these people, what I would not consider to be a good thing.
b) Again, the Neue Zürcher Zeitung, did not at all forecast what we whitness today. Rather, it is completely controlled by freemasonry. Tagesanzeiger is in this comparison considerably better, as it allows also critical voices. Again, Neue Zürcher Zeitung and all of this ‘sophisticated’ media, all have the same position like Gordon Brown regarding Gold who sold 400 tons of gold at 270$ telling the public this is a good thing. Now we have 1000$ gold, and media is continuing to tell us we should continue to trust the dollar, swiss franc, euro.
So I would recommend to start to read non-well-known economic writers. Try Bill Murphy from LeMetropoleCafe.

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